Credit underwriting cycles have a predictable rhythm: commercial lenders make ever-riskier loans during boom periods and then, during the busts that follow, often see their claims or liens attacked following the bankruptcy cases of their borrowers, either by the borrowers, their trustee or the official committee of unsecured creditors appointed in the case. The current recession is mature enough that a significant number of bankruptcies involving challenges to the secured claims of lenders have percolated to the point of decision.
Today we discuss two recent cases involving equitable subordination in bankruptcy that should inform the conduct of lenders when dealing with financially deteriorating borrowers, especially in such matters as credit facility amendments, forbearance agreements and providing additional financing.
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